Copyright: Project Syndicate, 2007.

www.project-syndicate.org

Winning Over Globalization’s Losers

Etienne Wasmer and Jakob von Weizsäcker

On both sides of the Atlantic, many view economic globalization as a threat to below-
average earners. According to a recent poll by the German Marshall Fund, majorities in
France, Germany, and the United States favor maintaining existing trade barriers, even if
doing so hampers economic growth. Clearly, the large net gains from global economic
integration are not enough to convince those who have lost their jobs and the many others
who feel at risk.

The recently established European Globalization Adjustment Fund (EGF) is an EU-wide

response to this challenge. The EGF can spend up to €500 million annually in EU
member states on workers affected by trade-induced layoffs. But sharing the benefits of
globalization with the losers is traditionally regarded as a national responsibility. For
example, the inspiration for the EGF, America’s Trade Adjustment Assistance,
introduced by the Kennedy administration in 1962, is a purely national scheme. Is EU
involvement really justified?
100%
The economic case for a European globalization
fund is that trade policy has been delegated to the
European level, while Union members retain
control rights to block decisions. Consider the
75%
hypothetical example of full trade liberalization in
textiles, which would have greatly asymmetric
effects between, say, Sweden, with hardly any
textile industry, and Portugal, with a substantial
one. Sweden would be a clear beneficiary while 50%

Portugal would be hit hard, owing to the large

number of displaced textile workers.

The negative impact of such redundancies is 25%

serious. OECD statistics show that 40% to 50% of Re-employed with better wage
displaced manufacturing workers in the EU15 Re-employed with wage loss
Not re-employed after 2 years
remain without a job 24 months after becoming
unemployed. Around 30% work in a job that pays 0%
less than the previous one. Only around one-quarter High Medium Low

are re-employed with a wage at or above the Prior Employment in Manufacturing

previous level (see chart). Grouped by Intensity of Import Competition

Chart: Manufacturing
Workers 24 Months after
Layoff in the EU15
Source : OECD
Through the EGF, part of the cost of helping displaced textile workers would be borne by
all EU countries, thereby making wider trade liberalization a more likely prospect.
Although Sweden, for example, would be a net contributor to the EGF, it might well be a
net beneficiary of the arrangement as a whole. In principle, a web of bilateral transfer
arrangements could achieve such an unblocking of trade. In practice, however, such
transfers hardly ever take place, so the potential gains from opening trade may fail to
materialize.

Nevertheless, the EGF’s rules need to be tightened, lest the scheme comes to be regarded
as a political gimmick. The current setup leaves too much room for discretion, as neither
necessary nor sufficient conditions for aid are clearly spelled out. This will expose the
EGF to wasteful political posturing and lobbying by countries and sectors. The EGF’s
rules should be amended to ensure that governments and trade-displaced workers receive
transparent, visible, and reliable assistance, as well as to spread best practice in active
labor market policy.

Displaced workers often face unemployment, a lower-paying job, or a new job far from
home. Of these, the unemployed typically receive most public support. To address this
distortion head on, and to provide clarity concerning the allocation of funds, the EGF
should focus its limited funds on two simple active labor market programs: wage
insurance and mobility allowance.

Wage insurance could offer workers whose pay was cut after displacement compensation
for up to two years amounting to half the difference between the old and the new wage.
The mobility allowance could offer those moving for a new job a lump-sum payment of
two months’ gross pay in the previous job, or four months’ pay for cross-border moves.
The very simplicity of this scheme will likely ensure high visibility and reasonable take-
up rates.

The downside of such a focused approach is also clear: the margin of choice for EU
members about how EGF funds are to be spent in their country would be minimal. In
view of the likely advantages, this might be acceptable if member states could be assured
that, if the schemes work, it will be expanded. This can be done as part of a reform of the
European Social Fund, which has an annual budget of around €10 billion – twenty times
the current funding of the EGF.

If the EGF does not prove effective, the money can simply be given back to the EU
budget or to member states. But if the EGF does work, the benefits would far outweigh
the costs.

Etienne Wasmer is Professor of Economics at Sciences-Po and OFCE in Paris. Jakob

von Weizsäcker is a research fellow at Bruegel, a Brussels-based think tank.